Will widespread adoption of EVs hurt state finances?
| AUTHOR | Anupam Manur |
| DATE | November 8, 2026 |
| CATEGORIES | Economic Policy |
Most of the discussion on electric vehicles in India is about emissions, oil imports and whether Indian manufacturers can compete. Much less has been said about what the shift means for state budgets, where fuel is one of the few tax handles left.
Since petrol and diesel were kept out of GST, states set VAT on them on their own, and they rely on it quite heavily. The petroleum sector contributed about ₹3.4 lakh crore to state exchequers in 2025-26 (provisional). Estimates of its weight vary, from about 15% of states’ own tax revenue on average to as much as 40% in some states. Given the general loss of financial levers in all other products, states rely on the revenue from taxes on alcohol and fuel.
However, an electric vehicle pays does not pay this VAT. The EVs use the same road and other infrastructure provided by the state, but pays no taxes. Electricity duty rates are low, and central guidelines ask that public charging tariffs not exceed the average cost of supply until March 2028.
Not paying taxes on fuel is one part, worse EVs cost the state finances in other ways as well. EVs attract 5% GST, against 18% on a small petrol car and 40% on a larger one, and half of this GST goes to the states. Many states, including Delhi, Maharashtra, Tamil Nadu and Telangana, have also waived road tax on EVs, a one-time levy that would otherwise run to roughly 8 to 18% of a car’s price. On top of this, states spend on purchase incentives, charging stations and electric buses. Many states provide incentives directly to the consumer for an EV purchase and even provides capital support for setting charging stations. It is slightly ironic that the states are expected to subsidise the components which will reduce their revenue.
This is only a potential stressor on state finances though and is not a crisis now. EVs were about 8.5% of new vehicle registrations in 2025-26, mostly two- and three-wheelers. Electric cars were under 5% of car sales, and diesel, used heavily by trucks and buses, is barely affected so far. But the erosion is steady and is expected to only increase with time.
Some states have started to react to this. Karnataka withdrew its EV road tax exemption in April 2026, and Uttar Pradesh let its waiver lapse in October 2025.
Over time, states will probably need to tax road use directly, through a charge based on distance or vehicle weight or even size, instead of relying on fuel as a stand-in. So far, the tax on fuel was supposed to cover road use, correct the negative externality of emissions and multiple other services, like parking, etc. States might need to unbundle these now. The UK will introduce a per-mile charge on EVs from 2028 for this reason. Indian states don’t have to copy that model, but they should start working out what replaces fuel taxes before EV adoption is completely widespread.